Social security? Privatize it!

On January 5, laying out his long-term agenda in a speech to the Cobb County (Ga.) Chamber of Commerce, House Speaker Newt Gingrich (R.-Ga.) bravely opened the door to free-market Social Security reform.

"Anyone who tells you we have only painful choices about Social Security doesn't understand the marketplace," said Gingrich. "We shouldn't have painful choices. We ought to have better choices with better returns and with greater opportunities.

"The power of compound interest means that the young people of today ought to have a better return on their investment and a higher value added. They ought to be able to retire with more money, not less. And anybody who says that can't happen should be introduced to the market. The fact is that we can do this."

As Gingrich well knows, there is only one way to do this-by allowing people the freedom to invest through their own individual accounts in the private sector in place of Social Security. Only through such an option can workers have "better choices with better returns" and "with the power of compound interest" actually "retire with more money not less."

Gingrich is clearly trying to move Congress down the road to such reform. Fortunately, he is not alone among House Republicans.

Freedom Pays

House Budget Committee Chairman John Kasich (R.-Ohio) told NBC's "Meet the Press" recently: "The answer to Social Security. . . is to basically set people free and allow them to make their own decisions." House Majority Leader Dick Armey (R.-Tex.) has also supported such reform.

Representatives John Porter (R.-Ill.), Nick Smith (R.-Mich.) and Mark Sanford (R.-S.C.) have already introduced separate bills providing for a full-scale private option for Social Security. In the Senate, Bob Kerrey (D.Neb.), Judd Gregg (R.-N.H.) and Phil Gramm (R.-Tex.) have also developed legislative proposals for private options.

Predictably, President Clinton wants to appear as though he, too, is part of the act. But what we have from him so far is posturing without substance. In his State of the Union address, Clinton will reportedly acknowledge the system's problems, then call for a lameduck special session of Congress next December to deal with the issue.

Equally peculiar, he has no reform plan of his own to offer-and his aides are throwing cold water on privatization.

Congressional Republicans should beat Clinton to the punch. Social Security privatization is broadly popular. A 1996 survey conducted by Clinton's own pollster, Mark Penn, found that even 73% of Democrats want to be able to invest at least part of their Social Security taxes in private alternatives.

Privatization would not only avert the Social Security financial crisis-which would otherwise require payroll taxes to increase by 50%-100% to pay promised benefits-but also would allow today's workers to earn much higher returns than the benefits now available. Average-income families saving in their own accounts instead of paying into Social Security would reach retirement with $1 million or more in today's dollars, which would pay them at least three times what Social Security promises.

The poor would especially benefit, earning over twice what Social Security gives them. What are the alternatives to privatization? Raising taxes, cutting benefits or a combination of the two-all of which would hurt the working poor most, who cannot afford higher taxes now or lower benefits in retirement.

How would privatization work? Last year, the Cato Institute published a reform proposal I developed. It involves no changes in benefits for those already retired, and those who want to stay in Social Security would be perfectly free to do so.

For those workers who instead take the private option, they and their employers would each pay 5% of wages, up to the Social Security maximum, into an individual account belonging to the worker. These payments would take the place of the current Social Security payroll tax of 6.2% each on employer and employee.

Workers and employers would also each continue to pay the remaining 1.2 percentage points of the current payroll tax into Social Security for 10 years to help pay the remaining benefits of today's retirees.

But after 10 years, the 1.2% Social Security tax would end completely for these workers and their employers, an effective eventual payroll tax cut of 20%.

Some of the funds paid into the private accounts would be used to buy private life insurance, which would replace Social Security survivors' benefits. Some would be used to buy private disability insurance, which would replace Social Security disability benefits.

But the remainder would be invested over the years in the private sector. Workers would be free to pick among the full range of private investment managers, including banks, stock brokerage firms, mutual funds and insurance companies. Self-directed investment options would be available for workers who wanted to choose the investments by themselves.

The same government regulations on investments that apply to IRAs today would apply to these retirement accounts, prohibiting only the most wild-eyed, risky investments.